The project involves detailed analysis of a S&P 500 company as follows: • Obtaining background information about the company • Investor perceptions • Creating hypotheses • Preparing a FCFF valuation model • Writing a report

1. 1
FIN41700
Financial Analysis of Alaska Air Group, Inc.
Mariam Zurabashvili 16205408
Zexi Shu 15205463
Yash Atul Gulve 19201183
Aaron O’Neill 15505707

2. 2
Price: $63.51 Recommendation: Buy
Target Price: $65.40
Basis For Conclusion
Alaska Air Group is currently trading at $63.51, through our valuation we concluded
the fair price of $65.40, with a potential of 2.97% growth. Over the course of the
past 12 months, ALK’s share price has risen over 14% YTD. It has completed its
merger with Virgin America in 2018 increasing their customer base. They have
benefited from significant cut in U.S. federal rate and increase in the revenue
growth rate.
About the Company
Alaska Air Group, Inc. is the holding company of two major U.S airlines. Alaska
Airlines and Horizon Air. Horizon Air, the Washington based corporation was
acquired by Alaska air group in 1986. Virgin America was acquired by Air group in
2016, and in 2018 they combined operating certificates to legally merge into a single
entity. The $2.6 billion dollar merger allowed Alaska to jump ahead of Jet Blue as the
5th
largest airline in the United States when measured by fleet size, scheduled
passengers carried and total number of destinations served. Together with their
partner airlines, Alaska air flies to over 115 destinations with over 1,200 daily
departures across the U.S, Mexico, Canada and Costa Rica.
Company Data
Ticker: ALK
Market Cap. 8.676B
Current Price (oct) 63.51
Target Price 65.40
52 Week Range 53.39-70.15
Avg. Volume 941,064
PE Ratio 14.13
EPS 4.92
2019 Highlights
On October 24th
2019, ALK
reported 3rd
quarter revenue
of $2.39 Billion, up 8%
compared to the prior year
Alaska Air EPS for the quarter
ending September 30th
, 2019
was $2.60, a 48.57% increase
year over year. This was
driven by a strong 3.9%
increase in revenue per
available seat mile, solid
nonfuel cost performance,
and a marginal decline in fuel
prices
ALK Share Performance
ALK’s share price is up 17%
YTD. This compares well with
the S&P 500 YTD of 22%.
Prices have been volatile
over the last 5 years, with a
high of $97.82 and a low of
$58.12, primarily driven by
merger related activities.
With a relatively high P/E
ratio and an increase in EPS,
investors have a bullish
outlook on the stock
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40
60
80
100
120
PRICE
ALK 10 Year Stock Performance

3. 3
Principle risks
Economy: The aviation Industry by nature is cyclical and is directly impacted by the economic growth of the
areas it operates in. Alaska Air is highly dependent on U.S consumer confidence which is directly related to the
health of the overall economy. Poor economic conditions historically have negatively impacted airlines due to
a reduction in spending for travel. This is evident from the 2008 financial crisis which proved to have a major
influence on the global airline industry. Poor economic conditions also impede their ability to counteract rising
fuel prices or labour related costs as they could not readily raise fair prices without affecting their customer
traffic.
Fuel: Alaska air’s financial position is highly dependent on the price and availability of fuel. The cost of fuel can
be extremely volatile and outside of the companies control. Over the past five years, fuel expenses have
ranged from 18% to 32% of total operating expenses. In 2018 fuel expenses accounted for 25% of Alaska’s
overall operating expenses, up 3% from 2017. The company uses oil call options as hedging in an attempt to
limit their exposure to changing fuel prices. This caps the price they pay for oil however, leaves them open to
the risk of overpaying for fuel also. They do this for approximately half of expected fuel consumption. It has
also committed to flying larger, more fuel efficient aircraft in an attempt to manage fuel consumption which
has improved their fuel efficiency by 1.3% over the last five years.
Competition: The U.S airline market is extremely competitive and is characterised by considerable price
competition. Alaska Air is currently the 5th
largest airline in the U.S. Its major competitors are Delta, American,
Southwest and United. In recent years, the market share held by low-cost airlines has increased noticeably
and it is expected to continue to do so. This increasing competition in both Alaska’s domestic and international
markets could have an adverse effect on their financial condition. Alaska aim to maintain and improve their
competitive position in the market by improving their cost structure by setting aggressive cost reduction goals
so they can continue to offer low cost, competitive fares while achieving satisfactory profit margins.
17.60% 17.30% 17.20%
15.10%
6.40%
AMERICANSOUTHWEST DELTA UNITED ALASKA
U.S airline domestic market
share (%)
130.36 127.65 127.48
111.61
47.03
AMERICANSOUTHWEST DELTA UNITED ALASKA
Domestic revenue passenger
Miles
(billions)

4. 4
Accounting Analysis
Revenue: Alaska air group organises its business into three operating systems. Mainline, Regional and
Horizon. The Mainline segment is Alaska’s largest operating system and was responsible for over 35 million
revenue passengers. It includes Boeing and Airbus flights from the west coast throughout the U.S, Alaska,
Canada, Costa Rica and Mexico. Adjusted pre-tax profit for the Mainline segment was $809 million in 2018. A
decrease of $435 million from 2017, primarily driven by a $306 million increase in non-fuel expenses and a
$370 million increase in fuel expenses.
The Regional segment includes Horizon’s and other third party carriers’ air transport for short-haul flights
across the U.S under capacity purchased arrangements. Alaska’s regional service provides air service to
communities without the demand for mainline service. In 2018, Regional operations carried over 10 million
passengers. Horizon is responsible for approximately 71% of Air Groups’ regional revenue passengers, making
it the largest regional airline in the Pacific North West. Regional operations incurred a pre-tax loss of $100
million in 2018, down $134 million from 2017. The loss was attributed to an increase in both operating
expenses and rising fuel prices.
The third operating system is Horizon operations. This includes the capacity sold to Alaska Air under capacity
purchase agreements. Expenses in this sector include employee costs, ownership costs and maintenance
costs. In 2018, Horizon had a pre-tax profit of $27 million. This improvement of $35 million from 2017 was due
to a $17 million decrease in aircraft maintenance, and an 11% increase growth in capacity attributable to
Horizon air adding aircrafts to their fleet.
Leases: The Air Group’s leases include aircraft, airport slots, ticket counters, gates, cargo, office space etc.
Alaska air also leases out training, administrative and data centre facilities. As of December 31st
, 2018 the Air
Group leases 112 or 34% of its aircraft in its Mainline and Regional fleet. The Air Group has leasing
commitments, which are future obligations for the company’s airlines, and as of December 2018, the company
has lease commitment contracts for 112 aircraft. They also have facility lease commitments which include
airport, terminal and building leases. In 2018 total expenses for aircraft and facility leases was $619 million, an
increase of 140% from 2016.
Off balance sheet issues and investments: The air group has a marketable securities portfolio, where they
invest in securities that meet their primary investment strategy of maintaining and securing investment
principal. However, the company has invested in large scale mergers and acquisitions with Virgin America
since 2016. This resulted in Alaska air recording a large amount of goodwill, which could result in a negative
effect on the company’s financial results.
Stock Options: Alaska Air Group recognises the fair value of stock options issued to employees as a stock-based
compensation method. It allows employees to purchase stock at a 15% discount, it is rather unlikely to result in
significant changes in the income statement or dilution of current shareholders’ stakes in the business.
Share Repurchase Program: Alaska Air Group has repurchased 776,186. The company announced $1 billion
share repurchase program in August 2015, accounting for 10% of the stock market capitalization of the
company. Under this program $438 million worth of shares were purchased by the company.
Mergers and Acquisitions: Alaska Air group was formed in 1985. It merged with Horizon Air in 1986 and Jet
America in 1987. Alaska Air Group announced plans to acquire Virgin America in 2016 in a $2.6 billion merger
and in 2018 legally became a single airline. In March 2016, Alaska Airlines announced plans to form a fully
owned subsidiary called McGee Air Services which will be operating as a vendor to the airline that will provide
ground handling, aircraft cleaning and wheelchair services to Alaska Airlines.
Solvency and liquidity: Alaska’s debt to equity deteriorated from 2016 to 2018 and then it improved in the
third quarter of 2019 to 0.79. The highest debt to equity ratio of Alaska was 4.2 whereas the lowest turned out

5. 5
to be 0.2 for the past 13 years. The dividend ratios of competitors of Alaska, Delta Airlines (1.09) and United
Airlines (1.78) were comparatively higher than that of Alaska’s. The company believes that their current cash
and marketable securities balance, combined with future cash flows from operations and other sources of
liquidity, will be sufficient to fund their operations and meet their debt payment obligations for the
foreseeable future. Alaska has lifted its dividends by approximately 23% a year on Average for the past 6
years. This suggests the company is suggests stability of the company and that it has enough cash to sustain
liquidity.
Valuation
We came to a price of $65.4 per share in our conclusion based on WACC of 7.07% and revenue growth rate
inclination since 2018 as displayed in our spreadsheet. Acquisitions of Alaska Air Group in the airline industry
increased its customer base which has led to a subsequent rise in revenue growth along with the increase in
the net operating capital
Fuel prices: Price per gallon was $0.02 less than expected, as a result our valuation shows operating
expenses has decreased by 4.1% overall.
Passenger revenue: Due to the completion of the Virgin America merger we assume that passenger
revenue will increase. If passenger revenue does not increase this would have a negative impact on our
expected share price.
Conclusion
In the absence of any major corporate news, we consider that Alaska Air is a good buy if trading at the current
price. With current price at $63.51 per share, we issued a buy recommendation with a target price of $65.40,
we feel this leaves room for considerable price appreciation. Alaska Air is dividend paying stock, having raised
its dividends 26% a year on average over the last 6 years making it an attractive investment for investors
seeking income, capital appreciation or both.
Bibliography
OST_R | BTS | Transtats, Transtats.bts.gov. Available at: https://www.transtats.bts.gov/ {Last accessed on
4/11/2019}
Alaska Air Group, inc 10-k report, investor.alaskaair.com. Available at: http://investor.alaskaair.com/static-
files/8eb5f892-f69e-4fe0-9ac8-1cbcc53c0a0d {Last accessed on: 4/11/2019}
Finance.yahoo.com. Available at: https://finance.yahoo.com/quote/ALK?p=ALK&.tsrc=fin-srch {last accessed
on 4/11/2019}